The dollar slips ahead of PMI reports and the Fed's minutes

There was a decline in the US dollar on Wednesday, which resulted in the dollar giving back some of the gains it had made in the previous session. It is believed that the minutes of the Federal Reserve's December meeting will provide traders with some key clues about future U.S. monetary policy.

This year started with a flurry of economic data. European stocks closed higher on Tuesday, helped by German inflation data coming in below expectations, easing for a second month in a row, due to a drop in energy prices for the second straight month.

After a warning from the International Monetary Fund that a global recession is likely in 2023, due to economic slowdowns in the main growth-producing regions of the US, Europe, and China, the dollar index climbed 1% on Tuesday as sentiment was dented. However, there seems to be no sign of the strength in the dollar regaining its momentum for the moment. Markets are now waiting for the release of the minutes of the Federal Reserve's December meeting later in the session, which is expected to have a big impact.

Events of the day

There are several economic numbers to digest on Wednesday, including figures on French inflation and service PMI data for the Eurozone, while in the US there will be more employment numbers that will be released along with minutes from the latest Federal Reserve meeting.

There are also other economic data due this week, including the ISM manufacturing report due on Wednesday as well as December's job report due on Friday. The Fed might be inclined to ease its monetary policy tightening if there is weakness in the labour market. However, the data so far suggests that, despite the rate hikes, the market is still tight.

Federal Reserve’s tightening path

In order to gain insight into what Fed policymakers think about the direction of interest rates, investors will likely comb through the report carefully. According to current market sentiment, the Fed is expected to increase the benchmark rate by a quarter percentage point at its next meeting. In addition, the divergence between doves and hawks about adjusting the terminal rate will also be of interest.

A majority of money market participants believe there is a 68% chance that the Fed will raise its benchmark rate by 25 basis points by February, with rates peaking at 4.98% by June.

Oil prices are set to weaken on demand concerns

A drop in oil prices on Wednesday continued the weak start to the new year. This was due to concerns that a global recession would hit the economy, thereby weighing on demand for oil in 2023, and making the price of oil fall.

In a recent statement, the head of the International Monetary Fund warned that much of the world's economies would have a tough year in 2023 since the main engines of global growth - the United States, Europe, and China - are all experiencing slowdowns in their economies.

Following Monday's holiday, the American Petroleum Institute is scheduled to release weekly data on US crude inventories later in the session, a day later than usual due to the holiday.